Mutual Funds
by 5paisa Research Team Last Updated: 2023-07-04T12:01:59+05:30
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Mutual funds are a safe way to earn high returns. Unlike stocks, mutual funds are managed by professionals with many years of experience. All you need to do is browse the various available schemes, choose the best one, and park your money. Having said that, selecting the best mutual fund scheme might be challenging, especially because fund houses provide various schemes like growth, income, liquid, ELSS, Fund of Funds, etc. Moreover, selecting the right type (direct or regular) is also crucial.

So, scroll down to know how to invest in direct or regular mutual funds and which scheme will be the best for you. The following sections explain each mutual fund scheme in detail and provide you with some time-tested tips to earn high returns.

How to Choose the Best Mutual Fund?

A mutual fund is a form of financial vehicle that pools the funds of numerous investors into a single investment product. The fund then concentrates on how to use those assets to invest in a group of assets in order to meet the fund's investment objectives. Mutual funds come in a variety of shapes and sizes. This large variety of accessible items may appear intimidating to some investors.

One of the most difficult aspects of selecting a mutual fund is the abundance of options accessible. You are absolutely spoiled for choice with over 40 AMCs, over 1000 funds, and over 2000 schemes available. So, how do you choose a successful mutual fund and put up the best mutual fund? Let us find out.

Identifying Goals

The first step is to make a list of all your financial objectives. Following that, you can compute the true worth of your objectives. The true worth of goals can be defined as their present values plus inflation during the investment term. You may also divide your objectives into three categories: short-term, medium-term, and long-term.

Your investment goals must be established before you invest in any fund. Is your goal long-term financial gains, or is your priority present income? Lay down all of your objectives for the various periods of your life, taking inflation into account, so that you have a workable strategy for how much, where, and how long to invest! When these are prepared, you should consider how to choose mutual funds that will assist you achieve these goals.

You will be able to choose the best mutual funds to select the mutual fund type depending on why you are investing. A debt mutual fund, an equity mutual fund, or a hybrid mutual fund can be used. For example, for some investors, the primary investing goal is financial appreciation on their assets. Others may benefit from tax breaks.

Risk Tolerance

The degree of risk associated with various mutual funds varies. As a result, your risk tolerance might have a significant impact on your mutual fund investing decisions. As a result, the second step is critical. To determine the best asset allocation for your portfolio, you must analyze your risk tolerance honestly and properly. Some people are more willing to take chances than others. Your risk tolerance is determined by your age, stage of life, and personal and financial status. If you can accurately analyze your risk, you will be able to select a mutual fund based on your risk tolerance. Knowing your risk tolerance will make choosing the best mutual fund much simpler for you. To make sure you are assuming the appropriate level of risk, you should be familiar with the scheme's risk profile. Bond or debt funds are appropriate for investors with low to moderate risk appetites, whilst equity funds are excellent for individuals with a moderately high to high risk appetite.

Fund Type

Understanding the different types of mutual funds is crucial because it will enable you to build a portfolio that matches your financial objectives. You can invest in a particular fund type based on your investment objectives. Following are some of different types of fund that you can choose to create a portfolio for yours:

Mutual Funds for Growth

Growth mutual funds generally invest in growth-sector equity equities. The primary goal of Growth Mutual funds, as the name implies, is capital appreciation. They are not ideal for long-term investments and have a high risk rating.

Mutual Funds for Income

Debt mutual funds are a subclass of fixed-income mutual funds. These funds invest their capital in a variety of income assets, including debentures, bonds, securities, and certificates of deposit. Income mutual funds are managed by competent fund managers who are responsible for capital preservation while also providing investors with a consistent income. This type of investment is appropriate for risk-averse individuals who want to keep their money for at least two to three years.

Mutual Funds that Save Taxes

Tax Saving Mutual Funds, also known as Equities-Linked Saving Schemes (ELSS), are funds that invest in equity. The funds invested in these programs are deductible under Section 80C of the Income Tax Act. While they are high risk, they can provide a substantial return if the fund performs well.

Liquid Mutual Funds

Liquid mutual funds are a type of debt mutual fund in which the money is predominantly invested in short-term and ultra-short-term securities such as commercial papers, bank certificates of deposit, treasury bills, and others. Liquid mutual funds exist primarily to provide liquidity. These are low-risk investments with moderate rewards. Investors seeking short-term investing options can choose the finest liquid mutual funds.


Trying to manage a large sum every day while attempting to lower market risk is pretty challenging. Because of this, SEBI-approved mutual fund providers set a fixed price for their offerings. Trying to handle a large sum every day while attempting to reduce market risk is really challenging. Because of this, SEBI-approved mutual fund providers set a fixed price for their offerings.

The fees for advising, administration, registrar and transfer agent services, legal and audit fees, investment management fees, etc. are all covered by this price. The total of all expenses involved in operating a mutual fund is, to put it simply, the expense ratio. This charge is imposed by each mutual fund scheme in order to manage money on behalf of investors. It is billed annually and is expressed as a percentage.

One-Time Fees

Mutual fund loads are one-time expenses incurred when investing in or withdrawing from a mutual fund scheme. There are the following fees:

Entry Load: These charges are levied at the time of unit purchase. Units would be sold by the funds for more money than the NAV. Different fund houses impose different entrance load fees. Typically, fees equal 2.25% of the amount invested. A new SEBI regulation, however, prohibits fund companies from charging an admission fee.

Exit Load: If investors decide to redeem their mutual fund units, they must pay this cost. For this, there is no fixed cost. Exit load varies per scheme and spans from 0.25 to 4 percent. 

Recurring Fees: Periodic fees are another name for recurring mutual fund expenses that are charged on a monthly, quarterly, and annual basis. Additional expenses like marketing, promotion, and portfolio management are paid for with this charge. The following are a few of the recurring fees:

Service and Distribution Charge: In order for the fund companies to promote and publicize a mutual fund, investors are required to pay a distribution fee to the fund companies. These marketing campaigns provide investors with updates. It also helps the fund management raise sufficient funds.

Management Fees: Management fees are expenses spent to pay mutual fund managers for their services and handling of investments. Other costs do not account for this.

Switch Price: Some funds allow you to switch between mutual funds. Therefore, you can change from Scheme X to Scheme Y for a price known as the Switch Price. Depending on the arrangement, the investment may be transferred in its entirety or in part.

Account Fee: Some AMCs charge an account fee and mandate that you maintain a particular balance in your trading accounts at all times. The AMC will deduct the necessary sum from the mutual fund portfolio if you don't meet the conditions for the minimum balance.

Fund Performance

Fund performance is an important aspect of investing in mutual funds. It should be given due consideration within a fair time limit. This ensures that the investments have been through several market cycles. This would allow for a constant return over time. If the fund has not outperformed its benchmark over three, five, seven, or ten years, it is reasonable to think that it is not a suitable investment.

When reviewing the performance of a fund, it is critical to look at the performance details of the fund manager or fund management team. Investors would benefit from a competent, stable, professional Fund management team with a reasonable tenure and an established track record.

It has been a lot simpler to monitor investment and portfolio performance in this digital and information era. Investors who made their investments through a broker or advisor frequently receive performance reports and updates on their portfolios. Numerous websites and smartphone applications track the effectiveness of schemes even in the absence of such announcements. Some of these websites offer the option to follow a specific portfolio. Mutual Funds are frequently reviewed and commented upon in well-known business publications. Additionally, Fund Fact Sheet allows you to keep track of your assets. Every month, each Mutual Fund releases this straightforward one-page review of a Mutual Fund scheme, with a focus on disclosing the portfolio and performance of the scheme. It functions as a report card that shows how well the plan is doing.

Expense Ratio

The expense ratio is the commission or fee charged by investors for appropriate investment management. It is essentially the fund manager's charge that is paid on all investors in order to ensure returns across all assets.
As an investor, you should seek mutual funds with lower fee ratios. This is because, while the percentage may appear little, when measured across your whole investment portfolio, it has a greater impact.

Expense ratio is important for certain types of investments like index funds or Exchange Traded Funds (ETFs). In actively managed funds, the fund manager’s ability to generate high alphas may compensate for higher expense ratios. Index funds or ETFs on the other hand, do not aim to create alphas and merely track the index. So expense ratio is important in index funds and ETFs.

Investment Time Frame

The time horizon refers to how long an investor desires to keep his or her money invested in a mutual fund plan. It might be as brief as one day or as lengthy as five years. It will be determined by how much time you have to attain your financial target. If you know how to select the proper mutual fund, you will understand that equity funds are best suited for long-term goals and debt funds are best suited for short- to medium-term goals. Overnight funds, liquid funds, ultra-short duration funds, and other funds are appropriate for very short investment tenures (less than one year).

Investment Objective

An investing objective is a list of goals that influences the financial portfolio of an investor. Using an investing objective, a financial adviser evaluates the best plan for accomplishing the client's goals. The risk tolerance and time horizon of an investor aid in defining an investing aim.

Know your investing goal before attempting to learn how to choose the best mutual fund. Do you want income stability or growth? Long-term capital appreciation is best achieved with equity funds, whereas recurring income is best achieved with debt funds. The majority of investors disregard this facet of investing. However, it is critical to the profitability of your investing portfolio.  Your investment objective must ally with that of the fund, so as to earn the potential reuters that your are seeking.

Entry & Exit Load

The cost you must pay when purchasing or selling units is referred to as an "entry load" or "exit load." The cost levied by fund houses to investors is referred to as the entry load.
The cost imposed when departing a mutual fund scheme is referred to as the exit load. This is only charged if investors leave after a short amount of time. This is done to deter fast exits and capital outflows from fund firms.Most fund houses, however, have withdrawn the entry fee.
As an investor, you should search for mutual fund schemes with no or low entry and exit loads.
The entry or exit load might be between 0.50% and 3% of the expenditure ratio. Some mutual fund schemes, particularly liquid funds, do not impose entry or exit loads, nevertheless.

Size of the Fund

When we talk about a mutual fund's size, we mean its whole asset base. It is the entire amount of money that a mutual fund manager is responsible for managing and investing. Many investors assume that the size of a mutual fund is significant. Size in this sense refers to the amount of money that a fund manages. This belief is unfounded. There is no fundamental reason why a larger fund is preferable to a smaller one. If a smaller fund has a stronger past record than a bigger fund of the same sort, investors should definitely go with the smaller one.

As an investor, you must avoid mixing cause and effect. Funds with a lengthy track record of strong performance tend to expand in size as additional investor money comes into them and has time to grow. Because they were good, they grew in size.

Invest Now Before The Market Changes Its Course

So, you know how to invest in direct mutual funds and ways to select the best schemes. It’s time to apply the knowledge you have acquired and invest to reap rich dividends. 

5paisa can be your go-to destination to get information about the best-performing mutual funds. You can compare funds, evaluate their performance, and invest within two minutes. 

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